Archives: China Film Industry

China Media and Entertainment LawOur lead China media and entertainment lawyer out of Beijing, Mathew Alderson, was recently interviewed for a VICE Sports story by Joshua Bateman, entitled, The UFC With Chinese Characteristics. The full text of the interview is below, with the publisher’s kind approval.

Alderson: I understand the UFC [Ultimate Fighting Championship] business is to be conducted by a Nevada LLC. The company promotes and produces mixed martial arts events broadcast free-to-air or through subscription services. I understand the company to have a broadcast deal with Fox Sports. The company is reportedly in discussions with Chinese buyers or investors. You are therefore interested in the effect Chinese ownership or investment may have on the management and regulation of the company.

At the outset, it should be appreciated that Chinese ownership of the Nevada LLC (or any other non-PRC company) would not, of itself, bring the company under Chinese regulation. The company would continue to be subject to regulation in the place in which it is established (Nevada and the United States) and the place or places in which it conducts business. The UFC would only become subject to Chinese regulation to the extent it conducts business in China. As a foreign company, the UFC could only promote its events in China with the assistance of a local partner with the necessary permits and licenses. Production of TV programs in China would also require the assistance of such a partner, probably a local co-producer. This is because foreign investment is restricted in the sectors in which UFC operates.

I answer your questions with these introductory remarks in mind.

VICE Sports: Is it possible Chinese regulators would view the UFC as a media company, and that would impact investment opportunities or how the company is regulated in China?

Alderson: Yes, it is possible because the UFC business model involves promoting live events and producing and broadcasting TV programs. These are sectors in which foreign investment is restricted. The impact would depend on whether the UFC established an entity in China and whether that entity is wholly Chinese or partly foreign-invested. A foreign-invested entity would attract greater scrutiny. The impact would be less if the Chinese market were approached by licensing content into China.

VICE Sports: If the UFC were to be acquired or were to accept investment from a Chinese company, would there be political/regulatory pressure in China for the company to alter its management or board structure to have more Chinese representation?

Alderson: Again, it would depend on where the company is operating and where the investment is made. There would be more scope for such pressure if a unit of the company were established in China, whether as a fully Chinese company or as a foreign-invested company. It would be much harder for Chinese owners to exert, or be subject to, this kind of pressure in holdings outside of China; although, if they had the necessary voting rights, Chinese owners could — like any investors — control or at least influence management abroad.

VICE Sports: If current UFC ownership does not sell the company but instead attempts to expand in China going forward, could they do so on their own or would they most likely need to join forces with a Chinese partner?

Alderson: They would need Chinese partners because foreign investment is restricted in the sectors in which they would likely be operating. The most likely business models are joint ventures and co-productions.

China copyright takedownsThis is the fifth in our series about online copyright takedowns in China. In Copyright Takedowns in China, we provided a general summary of the regulations that establish the takedown procedures. These regulations enable enforcement of the “right of communication through an information network” as it applies to sound recordings and audiovisual recordings. In Copyright Takedowns in China Part II: Searching, Linking or Storing? we looked at how providers of storage space face more liabilities than those merely providing searching or linking services. In Copyright Takedowns in China Part III — Audiovisual and Sound Recordings in the Cloud, we discussed how China’s takedown regulations apply to cloud service providers. In Copyright Takedowns in China, Part IV: Whatever you do, Register your Copyrights First, we made clear that “if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance.”

In this post we discuss your options after you have succeeded in taking down copyright material.

One of the problems with China’s notice and takedown system is that, after the material has been taken down, a copyright owner’s further recourse against an infringer is uncertain. This is because it’s hard to identify an infringer who has allowed material to be taken down in response to a notice. Infringers are only required to identify themselves to the copyright owner if the infringers object to the takedown. Without the identity of the perpetrator it’s hard, though not impossible, to initiate copyright infringement proceedings in China. The infringer tends to remain anonymous.

Solutions and practices are only slowly emerging in response to this problem in China and elsewhere.

One possible solution is a “notice and trackdown” procedure. With such a procedure in place rights owners can identify infringers and hunt them down. The implementation of something like this would require a balancing of the rights of copyright owners with rights of privacy. It would require an exploration of whether there should be an expectation of anonymity in cyberspace.

Some time ago, Frederick Mostert and Martin Schwimmer provided an excellent discussion of the issues in “Notice and Trackdown,” a paper published in Intellectual Property Magazine.

The issue is one of several covered recently in “Notice and Takedown in Everyday Practice“, a report by Jennifer M. Urban and Brianna L. Schofield, both of UC-Berkeley School of Law, and Joe Karaganis, of Columbia University. Part of the “Takedown Project“, the report considers the effectiveness of the notice and takedown process since The Digital Millennium Copyright Act was passed by Congress in 1998. In their findings, the authors conclude that, “Analyzing the effectiveness of [the] procedures in responding to infringing materials on specific sites, balancing copyrights and speech rights … is severely limited by the law’s lack of requirements for publicly disclosing information on notices sent and [online service provider] responses.”

Will we see the balance tip away from online anonymity in China? It would certainly suit copyright owners but it will be hard to say where anonymity should end and accountability should begin.

China Film IP
China Film IP

China film IP is hot.

During the Beijing International Film Festival last month, Mathew Alderson, who heads up our China media and entertainment practice, gave a presentation on China film IP. Presenting alongside Mathew was Tom Duke, Senior IP Liaison Officer at the British Embassy Beijing. This was a special event for the British Film Institute delegation to China.

Topics covered in the presentation included:

  • Top tips for film IP in China
  • The film business as a “restricted sector”
  • Sino-foreign film collaborations and co-productions
  • The UK-China Co-Production Treaty
  • Copyright in China
  • Contracts in China
  • The Internet and digital ancillaries

The UK Government recently published a Factsheet based on the presentation, stating as follows:

Increasing UK-China film cooperation is offering British films access to revenue streams in the Chinese market through a variety of business models. The Chinese intellectual property (IP) system has developed rapidly over the past 30 years. But a number of differences remain between international norms and the structures of the Chinese film industry and IP system. It is important for British companies to be aware of these differences and to prepare accordingly.

For more on China film IP see:

China motion picture copyrights

China’s film industry online — it’s about copyrights

China LawyersDue diligence is an investigation of a business or person prior to entering a contract. It often involves a comprehensive appraisal to establish assets and liabilities or to evaluate commercial potential. Though due diligence is important anywhere, it is doubly so in China where things are often not what they seem.

A failure to undertake due diligence is usually a factor, if not the decisive factor, in losses suffered by foreigners in their dealings with Chinese businesses. My firm’s China lawyers regularly encounter contracts signed with non-existent Chinese companies. We see deals with companies that are not owned or controlled by the people who handled the negotiations or made the promises. We see deals with companies that can never lawfully do what they promised to do. All of these problems could have been avoided with a basic company search report. By the time they came to light it was too late to fix them.

China company search reports are an important part of due diligence. They can confirm whether the Chinese company exists and, if so, whether it is in good standing with all of its annual filings up to date. Critically for enforceable contract formation, search reports confirm the full name and registered address of a company. A company search report will identify the individuals with effective control over the management and operations of the company. It will identify the stockholders. It will confirm the business scope, i.e., the business activities in which the company may lawfully engage. Depending on the relevant industry or business activity, lawful operations may require a number of other permits or licenses. These too can be found as part of the search process. In many cases, company search reports can garner other useful information published by the authorities.

Most of the important records are publicly available at the national Administration of Industry and Commerce (AIC) or the AIC offices in the municipality or the province where the relevant company is registered. The search process is relatively straightforward for anyone with the expertise and language skills. Searches should only ever be based on publicly available records but the information revealed should nonetheless be regarded as sensitive. Particular care should always be taken to ensure that captured information could not be regarded as secret.

So when things go wrong, don’t blame your Chinese counter-party if you never even bothered to check things out. China has a good system in place for anyone who cares to use it. In our experience, reputable Chinese businesspeople are untroubled by company searches and will readily provide key documents and information to make your search faster and easier. All you need to do is ask politely at the right time.

There is a right way and a wrong way to do business with China
                 There is a right way and a wrong way

I meet a lot of foreigners skipping through China on business. Many of them are delegates on trade missions or attendees at festivals or summits. They frequently allow their Chinese friends to pressure them to sign little documents while they’re in town. The foreigners think there can’t be much harm in signing short, “informal” documents with harmless sounding names like “LOI”, “MOU” or “HOA”. The artificial deadline tactic always seems to work for the Chinese whenever they try it on. Often there’s a kind of ceremony with officials in attendance and some nice banners in the background. Lots of photo opps. There may even be a banquet or two with the obligatory over-consumption of baijiu. More photo opps. It’s lots of fun and the foreigner goes home with a sense of achievement. They signed a deal in China!

Then we get two types of calls.

In the first type of call, the foreigner is shocked to find that their Chinese friends are resisting a long-form document by which the foreigner wishes to replace that harmless little LOI. The long-form is invariably written entirely in English and is full of common law irrelevancies and foreign standards that make it entirely unsuitable for China, not to mention disrespectful. Even if it ever gets signed it will take ages — ages during which there is good reason for the Chinese to stall in making any expected payments. Or the Chinese may even threaten to take action based on the foreigner’s negligence in the contracting process. But that’s all beside the point. The point is that the Chinese got what they wanted in their first pass so there’s no need for them to sign another document. The foreigner gave too much away in the beginning. My favorite examples in the film industry are the foreign producers who give away Greater China distribution rights without any mention of distribution costs and an appropriate waterfall. There are many more such examples across all industries.

Then there’s the second type of call.

The foreigner is disappointed that six months have gone by and nothing has happened since that harmless little LOI was signed. Emails are going unanswered. Phone calls unreturned. Suddenly, nobody speaks English any more. What the foreigner didn’t grasp was that the ceremony, with its banners and officials and photographs, was all the Chinese ever wanted from the relationship. There was no deal. The Chinese hit all their KPIs for that quarter by holding a little ceremony. The higher ups are happy and everyone in China has long ago moved on.

So, you need to decide from the outset whether you want an enforceable agreement or an unenforceable document. Do you want a real deal or do you just want to be able to tell people about some ceremony you attended.

If you want an enforceable agreement there is no reason why you can’t enter a proper agreement covering everything right from the start. Agreements in China tend to be shorter and less complicated in any case. That’s not to say that they can’t cover everything.

If all you want is an unenforceable document then you’ve got to wonder why you should sign anything at all. There’s an art to signing meaningless and unenforceable documents just as there is an art to signing something enforceable. But is it really worth it?

China Film Event. Photo by Sina Daily News
Photo by Sina Daily News

AmCham China’s Media & Entertainment Forum is putting on a what is sure to be a great event in Beijing on Thursday April 21st, from 5:30 p.m. to 7:00 p.m.: “China film finance — in conversation with Bennett Pozil of East West Bank.”

AmCham describes the event as follows:

China’s film business is growing at an astounding rate. The Chinese box office will eclipse North America’s in only a few years. Every week brings announcements of exciting new Sino-US film projects, investments and acquisitions.

Continue Reading China Film Finance Event, April 21 in Beijing

Getting money out of ChinaThe 40th Annual UCLA Entertainment Symposium took place this past weekend, and in recognition of the Chinese film market’s meteoric expansion, the symposium for the first time devoted an entire panel to China. The panel featured three high-powered Chinese film execs: Eric Rong, President of TIK Films, Jay Sun, Chairman and President of Pegasus Media Group, and Simon Sun, Executive Vice President of Le Vision Pictures (USA).

The panelists were uniformly positive about the future of US-China film cooperation and mutual investment, but the most interesting exchange (to me) was when they addressed the question of Chinese currency restrictions. The panelists agreed that getting money out of China was difficult and becoming more so, and commented on two general solutions. First, Chinese companies with substantial cash reserves in China can set up a credit facility with an international bank with a US presence; Rong said that this is what TIK Films’ parent company Hunan TV did with East West Bank (e.g., to finance its big deal with Lionsgate). Second, Chinese companies can set up a Hong Kong company and send money from that company, as Hong Kong dollars are freely convertible; this is what Pegasus does, according to Jay Sun.

These solutions are sophisticated, appropriate and (not surprisingly) in line with how we often advise our entertainment (and other) clients. A word of caution, though: these approaches will only work as long as the Chinese government allows them to work. Yes, Hong Kong doesn’t have currency restrictions, but companies still need to get the money to Hong Kong in the first place, and that  requires pretty much the same approvals as sending money to the US directly. Alternately, Chinese companies can get money to their Hong Kong company by requiring that customers send payments to Hong Kong for goods or services provided in China. This is perfectly acceptable—so long as the Chinese companies have secured prior Chinese government approval for the Hong Kong bank account and report and pay taxes on such payments. I think you can guess how often that happens. The Chinese tax authorities haven’t been overly assiduous about enforcing these restrictions over the past several years, but I would be surprised if that didn’t start to change.

To give you an idea of how often these Hong Kong bank accounts are set up legally, many years ago we represented a very large publicly traded U.S. company that had just bought a China WFOE. All twenty of the WFOE’s major China-based suppliers were getting paid in Hong Kong. Our client did not like this, because it felt it might be seen as facilitating tax evasion. So our client requested that the suppliers provide proof that their Hong Kong bank accounts had been approved by the Chinese government. We got the following responses:

  • 4-5 said, “Are you kidding? Everybody does this and no one gets approval.”
  • 4-5 said “Are you kidding? I’m not going to send you any documents.”
  • 4-5 sent us non-responsive documents they apparently thought we would take to be Chinese government documents allowing them to open a bank account in Hong Kong.
  • The remainder just ignored our request.

Not a single one of them produced a shred of evidence that their Hong Kong bank account had been approved by the Chinese authorities.

Another common method of converting RMB to dollars (not mentioned by the panelists because it isn’t relevant to the financing of major studio films) is the “exception” that allows each Chinese individual to send $50,000 overseas each year. Wealthy Chinese individuals seeking to fund a movie or Broadway show, purchase real estate, or invest in an EB-5 project have taken advantage of this loophole by recruiting a gaggle of people in China to send money on their behalf. This process, known as “smurfing,” has been widely used for years. I’ve met multiple people at the US-China Film Summit who proudly told me their entire business model was based on facilitating these payments. At dinner the other night, an acquaintance told me about a Chinese factory owner he knew who had required 200 of his employees to send $50,000 each to the United States. But smurfing is legally questionable and the Chinese government is claiming down on this as well. As my colleague Steve Dickinson observed in a recent interview with Bloomberg Business, banks are sometimes refusing such transactions by saying they simply don’t have any dollars available.

Long story short, we can expect to see more US-China film deals fall through for lack of funding, and it won’t necessarily be the fault of the Chinese company. Simon Sun referred to a piece in the Los Angeles Times last year (presumably this one) about the large number of US-China deals that had fallen apart because the money never came through. Sun stated that the article was true, but biased – deals have been falling through as long as Hollywood existed – because the legitimate Chinese companies are real (and have real money). I couldn’t agree more. But it’s often hard to tell who’s for real, which makes both due diligence and the way the deal is structured more important than ever.

Come to AmCham's Media and Entertainment event on March 21 in Beijing
AmCham Media and Entertainment event on March 21 in Beijing

 

AmCham China’s Media & Entertainment Forum is putting on a what is sure to be a great panel in Beijing on Monday March 21, from 12:00 p.m. to 2:00 p.m.: IP in China’s Entertainment Industry — the Big Issues.

AmCham describes the event as follows:

The rapid growth and increasing sophistication of China’s entertainment industry present both challenges and opportunities to foreign businesses. Foreign owners of audiovisual content confront a range of complex IP issues. Many of these are particular to the Chinese market. Come hear our panel of experts discuss the big picture as well as delve deeply into such issues as:

  • How an IP case winds its way through Chinese courts
  • Recent examples of Chinese IP litigation in US courts
  • How takedowns work
  • Format protection
  • When you can (and should) litigate around IP issues
  • Emerging IP trends within China’s entertainment industry”

Mathew Alderson, who heads up our China media and entertainment practice out of our Beijing office and is a co-chair of the AmCham Media and Entertainment Forum, will  be one of three panelists, along with Joel Blank, IP Attaché for China at US the Embassy, Tom Duke, Senior Intellectual Property Liaison Officer at the UK Embassy. Kristian Kender, Managing Director of China Media Management Inc, and the other co-chair of AmCham’s Media and Entertainment Forum, will be the moderator.

Please go here to learn more about the seminar and go here to register

If you’re going to be in Beijing on Monday March 21, you should get along to AmCham for this great panel.

China Film Industry

Mathew Alderson, our lead China media and entertainment lawyer out of Beijing, was interviewed recently for a China Economic Review story by Hudson Lockett, entitled, 2015: The Year China’s Film Industry Doubled Down on Content. The full text of the interview is below, with the publisher’s kind approval.

CER: What were the biggest developments in China for cinematic IP during 2015 and in the year to date?

Alderson: In my opinion there were no particular developments. We simply saw the continuation of a trend in which the Chinese are prepared to pay more for the right to distribute foreign content. For instance, 2015 saw a big increase in fees paid for flat-fee imports. These are usually non-studio films outside the 34-film quota for revenue share imports. Tencent provides another example. In 2015 Tencent augmented its earlier purchases of Hollywood content by acquiring catalogues from Fox and National Geographic for streaming in China. In my view, this trend is supported by steady improvement in copyright protection. Chinese companies in particular are reporting greater success in administrative proceedings against pirates. These proceedings are run by government departments and not by the courts. The fines can be quite substantial. Copyright is now becoming a sword in the hands of Chinese rights owners. Chinese companies are not going to spend a lot of money acquiring rights from foreign sources only to let Chinese pirates in the next province free-ride on the investment. Up until quite recently it was only the foreigners that had this kind of attitude.

CER: How has the November release of a draft law on box office regulation changed the industry landscape, and are there any legal ramifications already being felt prior to the final version seeing daylight?

Alderson: It has not changed the landscape and there have been no legal ramifications as far as I can tell. As I said in my blog post on this at the time, “Fundamental changes to the existing regulatory framework, as it affects foreigners, are not proposed in the draft law. Foreigners will still be prevented from engaging independently in film production in China. Foreigners will still be prevented from engaging in film distribution in China. No mention is made of any lifting of the quota on importing foreign films on a revenue-sharing basis. Still, many of the changes would definitely streamline the official co-production process for foreign producers. There is also now express official recognition of the need for improvements in the system of film finance and the need for tax incentives for local producers.”

CER: Recent years have seen improvement in copyright protection — for example with takedown requests for content online. But 2015 saw some high-profile domestic films marred by infringement and plagiarism claims. Where does the disconnect lie in terms of enforcement on these two fronts?

Alderson: China’s takedown system works quite well but it does not compensate copyright owners for their losses. Once infringing content has been taken down that’s usually where the matter ends unless the copyright owner is prepared to initiate court proceedings. In that case the owner will confront the objection that a takedown provided, or could have provided, an effective remedy. It is very hard to prove copyright damages in Chinese court proceedings. A very low statutory ceiling applies if damages are not clearly proven. The result is that the threat of damages is not a deterrent to infringement. At the same time, foreigners have not been as successful as Chinese companies in seeking administrative relief for copyright infringements.

CER: There was some controversy last year when one studio executive suggested screenwriters should take a backseat to other sources of IP on the rise in China, such as online fiction. It may have sounded flip, but to what extent does that sentiment reflect real changes in how new IP is sourced domestically?

Alderson: I frequently hear that there is still a shortage of good screenwriters in China. We have not yet seen the emergence of a professional class of screenwriters supported by a guild, and represented by professional agents, as we have in Hollywood. The secretary general of the Guangdong Film Industry Association reportedly put it this way, “In the future, the model will be: we find out what you want to watch, then we make it for you. Only those investors who understand the Internet and mobile users will be able to turn a handsome profit from filmmaking.” I think he is right. Internet companies can use their access to social media, big data and online ticket sales to pick trends and test audience tastes. Whether the scripts will be of a high standard is another matter.

CER: In addition to the standard Hollywood blockbusters and domestic sequels, a few of 2015’s top performers at the box office had roots in streaming online sketch comedy, and one was actually crowd-funded. Are these reflective of deeper changes in audience interest and, as a result, industry funding?

Alderson: Yes. We are seeing domestic motion pictures emerging rapidly out of so-called online literature. The online space is surprisingly robust and vibrant here. If a relatively small proportion of the population shows interest in a particular idea or topic the population is so large that you are suddenly talking about a massive audience. This is what drives Chinese online innovation. There are about half a billion people online in China. They are all using handheld devices. They leapfrogged desktops and PCs just like they went straight to mobile without fixed line phones. For many of them, consumption takes place entirely online. This is not happening anywhere else in the world.

CER: Does January’s Wanda-Legendary deal represent something bigger for how IP is approached by Chinese firms at the national and global level?

Alderson: I don’t see a unique IP angle but it’s still a big deal.

Legendary Entertainment is a proven Hollywood production company. It’s Hong Kong affiliate, Legendary East, has a co-production deal with China Film Company, a powerful Mainland S.O.E. That same affiliate is now producing, for global release, a big-budget Chinese motion picture with a major Hollywood star and one of China’s most famous directors. A majority stake in Legendary Entertainment would give Dalian Wanda unprecedented production capacity spanning China and the U.S. The potential for the integration of this capacity with the theatrical exhibition reach of Wanda Cinemas and AMC Entertainment is self-evident.

This definitely holds true for China copyrights takedowns.
This definitely holds true for China copyright takedowns.

 

This is the fourth in a series about online copyright takedowns. Copyright Takedowns in China was a general summary of the regulations that establish the takedown procedures. These regulations enable enforcement of the “right of communication through an information network” as it applies to sound recordings and audiovisual recordings. Copyright Takedowns in China Part II: Searching, Linking or Storing? looked at how providers of storage space encounter more liabilities than those merely providing searching or linking services. The application of the takedown regulations to cloud service providers was covered in Copyright Takedowns in China Part III: Audiovisual and Sound Recordings in the Cloud.

Our China lawyers are handling more and more takedown work these days and one thing is very clear: if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance. The reason for this is simple. If you attempt to invoke China’s notice and takedown system the internet service provider will put you to proof. If you don’t have a Chinese copyright registration certificate ready to go you will need to prove your copyright ownership. Though Chinese network service providers all have their own requirements for this, all of them will require you to provide a bunch of chain of title documents that have been translated into Chinese. These documents will be essentially the same as those required to obtain a registration anyway. Once you have proven your ownership to a network service provider, you will have nothing to show for all the work, except, we would hope, the taking down of the infringing content in one instance. You will need to repeat the exercise again and again if numerous sites are involved or if your content goes back up again on a site from which it was taken down.

So speed up the takedown process, and have something to show for your work, by registering your copyrights in China. If you have your chain of title ducks in a row it will be quick and inexpensive to get a registration. You will then be ready to strike.